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Bypassing the aid trap in Pakistan

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By Glenn Hubbard
Friday, November 13, 2009

Congress recently approved $7.5 billion in aid to Pakistan for social and economic development. The bill incited controversy by requiring that the U.S. secretary of state report to lawmakers on whether Pakistan's civilian government keeps effective control over its military, because many observers accuse some in the Pakistani military of having tolerated or even aided Islamic extremists since the 1980s.

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But the bill itself should raise questions. After all, does Pakistan, or the U.S. Agency for International Development, or any other agency that will implement the aid actually know how to successfully spend these funds? In other parts of the world, especially Africa, foreign aid has been a spectacular failure in promoting social and economic development. This bill promises more of the same.

The United States has given Pakistan more than $10 billion in development aid since 1954. What has become of those funds? It certainly has not helped produce the kind of stability and prosperity that would help Pakistan offer its people an alternative to extremism. Nor has aid worked in Africa. Nothing indicates that an additional $7.5 billion will yield better results.

All, however, is not yet lost. It will take time to disburse and spend the funds, and there could be a chance to recast the support in a more promising way. There is even an example of effective large-scale aid on which to draw: the Marshall Plan of postwar Europe, which is still recognized as the most successful aid program in history.

The essence of the Marshall Plan was loans to local businesses, which paid them back to their local governments, which used the money for commercial infrastructure to help those same businesses. The result was economic growth, employment and a stable middle class that opposed the popular communist parties across Europe. With creative adaptation, the same basic model can work in Pakistan.

Economic aid to Africa and Pakistan has tended to be allocated to government-directed development projects. More recently, such aid has funded projects by nongovernmental organizations (NGOs), too. But all of the world's prosperous countries became rich through the growth of a domestic business sector. India and China are the most recent examples of this. A thriving local business sector is the only known path to prosperity and stability.

Some might argue that Pakistan is too different from postwar Europe for a Marshall Plan to work. But consider Greece, a poor and war-torn nation when the Marshall Plan was implemented. By the time the plan was ended, Greece was well on its way to prosperity. This model can be reinterpreted to best suit the Pakistan situation: The kinds of loans can vary widely, and the commercial infrastructure can range from training for accountants to the more traditional ports and roads.

The World Bank's Doing Business index ranks countries by how easy it is for citizens to start and run businesses. Among the 183 nations ranked, most of sub-Saharan Africa falls in the bottom half. Pakistan, at No. 85, is less anti-business than most poor countries, so a Marshall Plan there has a reasonable chance of success.

Right now, nothing in the package suggests that this $7.5 billion will do any better than previous development aid, largely because government and NGO aid projects make it harder for prosperity to take root. Aid projects hire qualified staff away from local businesses. For example, they deliver fertilizer to farmers instead of a local business doing it. And they remove incentive for Pakistan to make reforms that foster business development. After all, why make it easier for business when government and NGO projects give out so much money?

But a Marshall Plan would help Pakistan's efforts to encourage its local business sector. The efforts are there: In August, Prime Minister Syed Yousaf Raza Gilani established the first Business Persons Council; it has 53 members from the local business community and is headed by the minister of finance. The council is to meet monthly "to recommend measures for improvement in business climate in Pakistan and develop a business and trade sector strategy for the country." This is a major shift from tradition, in which the government Planning Commission was solely in charge of economic policy. Foreign aid should work with this new effort rather than at cross-purposes with it.

Former secretary of state George Marshall famously suggested fighting the spread of communism in Europe through local business. That strategy could contribute to the battle against Islamic extremism. The current aid package should become a Pakistan Marshall Plan -- before it's too late.

Glenn Hubbard, dean of Columbia Business School and a former chairman of the White House Council of Economic Advisers, is the author of "Aid Trap: Hard Truths About Ending Poverty."



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